A bless in disguise?

Johannes Linn and Colin Bradford of the Brookings Insitution point out in their latest paper titled "Could the Financial Crisis Push Global Governance Reform?" that the Nov 15 economic summit in Washington DC of the heads of state from the G20 industrailised and developing economies could represent a major step toward a new architecture in global financial and economic relations as a first step in global governance reform more broadly.

The Nov 15 summit will be the first ever meeting of G20 countries at head of state level and gives the next president of the United States an opportunity to demonstrate a commitment to the G20 as a better global steering committee than the G7/8. Read full article.


Colin Bradford will take part in the inaugural launch of the S.T. Lee Project on Global Governance conference - a multidisplinary reseach project of the Centre on Asia and Globalisation at the Lee Kuan Yew School of Public Policy.

Time for an Asian Social Stock Exchange

As I write this article, the storm in the financial markets continues -- stock markets in Asia, Europe and the US all are going through roller coaster rides, people fear bank runs and governments are pulling together trillion dollars worth of rescue packages. In this sadly crazy historic moment, when every current option is looking bleak and governments are busy cleaning up the private sector mess, perhaps it is a good time to look some distance into the future toward a gleam of hope for a kinder and gentler form of capitalism. My suggestion for that is to put together effective regional 'social stock exchanges' in each continent that can spearhead social good through capital markets. I believe Asia is ripe to take the lead in meeting this challenge.

What is a social stock exchange? It is a stock market where investors who care about social and economic returns buy stocks and bonds of companies that have strong economic and social returns. Interestingly, in a social stock exchange both not-for-profit and for-profit companies can participate. For-profit entities can either issue shares representing ownership in their companies or issue bonds. Meanwhile not-for-profit companies can utilise the stock exchange to issue bonds an action in itself that can bring operational accountability to the not-for-profit sector (as opposed to carte blanch donations from foundations).

Although Professor Muhammad Yunus discusses the idea of a social stock exchange in his latest book, Creating a World Without Poverty, and has been promoting it in lecture circles, the concept is not a new one. There are already several Social Stock Exchanges in operation or in the works, albeit each uniquely different from one another.

BOVESPA in Brazil was the first social stock exchange in the world. It was launched in 2003 with the objective of bringing together non-profit organisations and the social investors who are willing to support their programmes and projects. For BOVESPA investors, the return is solely in 'social profit,' where the investment brings about a more just society with opportunities for the poor and neglected. By providing capital for the non-profit organisations that list on this exchange and the providing social value for the investors who participate in this exchange, BOVESPA aims to change the labeling of non-profit organisations to 'Social Profit Organisations'. So far about 43 Social Profit Organisations have raised capital through this exchange. However, trading of stock in this exchange is still a distant goal.

Europe's answer to social investing is the FTSE4Good. Set up by FT Stock Exchange in London, FTSE4Good is an index for socially responsible investment. The definition of 'socially responsible' for this index is very broad and covers topics such as: working towards environmental sustainability, developing positive relationships with stakeholders, and upholding and supporting universal human rights. There are about 25 companies in this index. Given FTSE financial requirements, these companies are large for-profit entities which in many cases have very tangential effects on positive social change. Their 'social mission' often springs from the defensive posture of CSR rather than from a genuine effort to make positive social impact.

In North America, Green Stock Exchange (GREENSX) is attempting to become the Social Stock Exchange for that continent (and Europe). This Canada-based social stock exchange is aiming to launch by end of the year to trade shares in social businesses. GREENSX's definition of social business is a business that makes a profit but benefits society as well delivering a triple bottom line return (economic, social and environmental return). GREENSX's goal is to provide small green issuers access to public equity capital efficiently while ensuring liquidity for the investors. The success of GREENSX remains to be seen.

There is obviously a budding global interest in the notion of social stock exchange. Recently, Rockefeller Foundation donated $500,000 to the UK government to pay for a feasibility study for a social stock exchange. The Foundation picked UK as the site for the feasibility study because of the UK government's support for social enterprises. Existing UK government initiatives include legal reforms for separate incorporation for social businesses and plans for a social investment bank funded with unclaimed assets held by financial institutions.

All this is encouraging in a global perspective; now, how about Asia and, in particular, Bangladesh? Bangladesh is a country that continues to produce remarkable social enterprises, and given the state of the country and the world, it can be expected to keep the pipeline of social innovation flowing. The limiting factor is, of course, capital. Let us move a few degrees east in longitude, and there is a country, which -- though a small dot on the map -- is wealthy, is a player in the financial markets and is itching to make a mark in social business. This country is, of course, Singapore. Singapore is ready, able and perfectly positioned to be the home of Asia's first Social Stock Exchange. Bangladesh is ready, able and perfectly positioned to pepper that exchange with very effective social businesses. This is a match made in financial heaven.

Now, what's the next step? It is very simply for the Bangladesh government to have the vision and desire to initiate a ground-breaking discussion with the Singapore government. Bangladesh is well positioned to make its mark in the next economic revolution of conscious capitalism. It can take its rock star social entrepreneurs Yunus and Abed -- and get them to perform the ground-breaking concert for the social stock exchange for its potential partner Singapore.

Thus, my request to the Bangladesh finance ministry use this opportune moment -- initiate the courtship and get Bangladesh on the global financial map. We are all waiting.


Durreen Shahnaz is the regional managing director of Asia City Publishing Group and adjunct associate professor at Lee Kuan Yew School of Public Policy at National University of Singapore.

Financial Crisis 101

Stinking Rich & We Need You!

Image source: The Economist
On Sept 29, US$1.2 trillion was wiped off the value of the New York Stock Exchange as members of the House of Representatives in the US, under pressure from constituents, voted against the US$700 billon bailout package designed to resuscitate the financial system. The knockback sent reverberations around the world, with markets falling sharply from Europe to East Asia.

What this knockback demonstrates, despite the "we are all capitalists now" proclamations of recent years, is that many Americans feel little affinity with the Wall Street set who had been "managing" their investments and who had extended their mortgages (without worrying about who would extend the cash needed to service them).

Many argue that this is a crisis of regulation, or a crisis of responsibility and ethics, as if these were technical problems to be tweaked. However, the roots of the political (as opposed to the strictly financial) crisis we are currently witnessing run much deeper. A quarter of a century of globalisation has fundamentally transformed not only our economies, but also our states and societies, leaving politicians few options.

While the current crisis has often been compared to the Great Depression of the 1930s, the two periods are distinctly different. The way out of the Great Depression essentially involved the establishing of a political compact between industrial capitalists and organised labour, with the state acting to stimulate demand and mitigate the risk to workers through a variety of compensatory mechanisms. What followed was a period of relatively equitable economic growth in the developed world that, among other things, gave birth to the mass consumer society of our time.

In contrast, the era of globalisation, which was ushered in by declining rates of profit and other crises in the 1970s and '80s, has involved a process of "financialisation", where the relationship between industrial and financial capital, which concerned political economists from Marx to Keynes, has apparently become largely redundant. Financial deregulation has permitted the enormous growth of global markets for a variety of financial products, which act somewhat autonomously from and greatly eclipse the "real" economy of trade in goods and services.

Financialisation has been part of a broader process that has placed the market at the centre of social relations, redistributing wealth and power. This has involved assaults against worker rights in many industrialised countries at a time where capital has been liberated to relocate to sources of cheaper labour.

Furthermore, at the same time many workers in the West have been both voluntarily and forcibly drawn into becoming investors - substituting the socialisation of risk that was embodied in the welfare state with tying pension plans to the market like never before.

And while the massive extension of credit, both in the form of mortgages and credit cards (which are now often tied together), provided palliative care to many, with some workers experiencing declining real wages, it also served to further lock them to a highly volatile system in which they had very little power to advance their interests vis-a-vis highly powerful and well-connected market players.

Meanwhile, the risk to capital has been socialised, with public bailouts a common feature of the past 25 years, regardless of the recent failure of the US government's rescue package. Yet, despite such bailouts, under globalisation arguments have been continuously advanced for less regulation and for the importance of paying CEOs "well".

In this hyper-capitalist environment inequality has been soaring, with the average pay packet of a high-end American CEO being 250 times that of an average wage earner. In short, there has been concentration of capital that still retains an insatiable appetite for profit.

In trying to satisfy this appetite capital has gone in search of returns in dangerous waters (such as that section of the population that aspires to owning homes yet has been so marginalised that it does not have the means to service its borrowings). In the short term, you can disguise this concentration by creating complex financial instruments to on-sell. In the medium-to-longer term, reality hits home when people begin to default.

So the big question seems to be not how to reregulate financial markets, but whether everyday citizens can be convinced that their interests are advanced by a different set of interests to theirs and an ideology that has spent the past quarter of a century eroding the "over-regulation" of the Western welfare state and dispensing with its social safeguards.

While US taxpayers were told by people like US Treasury Secretary Henry Paulson that bailing out capital was necessary to support the system for everyone and that caution had to be exercised in reregulating the financial sector, middle America doesn't appear to have much sympathy for him or the obscenely remunerated "Just Do It" set at the centre of this debacle.

The US government will still be able to put together another bailout package; however, the crisis seems far from over for the very reason that it is hard to see where new sources of real productive output will emerge, especially in an economy such as the United States.
The game of smoke and mirrors no longer holds any attraction for those left with cash to allocate.

Where the fix to the Great Depression came in the form of redistributive measures to workers within the domestic economy - a globalised world makes this process next to impossible for the very reason that capital can so easily relocate to cheaper sources of labour outside of America.

Even if capital can get back on its feet with a public bailout, finding profitable undertakings inside US borders that benefit the broad population seems highly unlikely.


Shahar Hameiri is a doctoral candidate at the Asia Research Centre, Murdoch University. Toby Carroll is a research fellow at the Centre on Asia and Globalisation, Lee Kuan Yew School of Public Policy, National University of Singapore. This article "The Politics of the Financial Crisis" was published in Bangkok Post.


RECOMMENDED READING: Emerging Lessons From The Crisis by Eswar Prasad *

"Whatever the final outcome, one thing is certain– the rest of the world will no longer be enthusiastic about adopting the free-market principles that guided US financial development. While desperate times may call for desperate measures, massive US government intervention will also make it difficult in the future to make the case that the state should stay out of the workings of the financial system."

* Eswar Prasad is professor of economics at Cornell University and a senior fellow at the Brookings Institution. He is the former head of the IMF’s Financial Studies Division.

In Memory of Gordon Gekko

Just wondering how many Wall Streeters are youtubing Gordon Gekko's "Greed is Good" speech video and reminiscing about the good old days.... (click image to view video)

Here are some of memorable Gordon Gekko quotes from the movie "Wall Street":

● "Greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."

● " We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you're not naive enough to think we're living in a democracy, are you buddy? It's the free market. And you're a part of it. You've got that killer instinct. Stick around pal, I've still got a lot to teach you."

● "It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another."

● "Lunch is for wimps."

Perspectives on the US Financial Crisis

LKYSPP Professor Charles Adams spoke on the current financial turmoil at a panel dicussion held at the Asian Development Bank on 19 September. Here are his views on the crisis:

The dynamics of the current financial crisis are broadly similar to many other crises. First, there is a period during which too much credit is extended, leverage rises to very high levels (in large measure through derivatives and low margins), and people start to believe that things will be different, based on a “story” of a new era (the Greed period).

This is the boom or bubble period that precedes the eventual collapse, as vividly documented by Kindleberger in his study of financial crises.

Second, there is some event (the “Canary in the coalmine” moment) that triggers a reappraisal of the story and, ultimately, a reversal of the excesses during the boom. The problems in the sub-prime segment of the US real estate market likely served as the wake up call during the current crisis.

In this second phase, positions are unwound, leverage is reduced, and financial firms begin to scramble for capital and liquidity in response to losses and writedowns (the Fear period).

Finally, following a series of ad hoc interventions involving lender of last resort and life-boat rescues, the official sector steps in with bold measure such as guarantees and the purchase of substantial chunks of the financial system and/or distressed assets.

For those with at least some familiarity with financial crises, the time signature of every crisis is uncannily similar. In the unhappy ending to many financial crises, the economy enters a deep and protracted downturn and public debt levels soar to high levels as the official sector bails out the private sector. The current crisis fits this mould. As the crisis is far from over, however, one should be careful in speculating about the end point.

The current crisis is only one of a large number of financial—and, particularly banking-- crises that have occurred in recent decades. The key wrinkles this time around are that the crisis blew up in the core rather than the periphery of the system (recall the large number of recent crises that occurred in emerging markets at the periphery of the system); has been affecting multiple markets, instruments, and institutions (commercial banks, investment banks, Insurance companies); and has spilled over across countries as financial risks were unbundled and sold around the world. Intriguingly, new financial players such as Sovereign Wealth Funds are starting to play a role as sources of new capital while hedge funds, at least thus far, have been in the back seat.

As in other crises, the current episode has involved a breakdown of the multiple lines of defence set up to deal with periods of excessive exuberance.

The first line of defence is the risk management of financial firms. Arguably, risk management across a range of firms has again been subject to massive failures, and their oversight oards have not performed as intended.

The second line of defence includes all the various market and official analysts-- as well as credit rating agencies--that monitored the US financial sector and failed to spot impending problems until too late. A conflict of interest on the part of rating agencies that advised on, and then rated, complex financial products likely played a role here, and will need (somehow) to be addressed. But it is also staggering how many other private and official observers did not predict problems, and did not call for action that could have avoided the excesses.

Finally, in the third line of defence, the very fragmented US regulatory bodies did not play their proper role and were arguably “asleep at the wheel” as the shadow banking system bloomed. Clearly, any one of these lines of defence could have prevented the crisis but each broke down, with serious consequences.

US-led Capitalism: R.I.P?

(Cartoon source: The Economist)

New Century Financial. Sachsen Landesbank. Bear Stearns. IndyMac. Fannie Mae. Freddie Mac. Lehman Brothers. Merrill Lynch. AIG. They were all US companies that went belly up in the last few months.

British bank Barclays bought Lehman Brother's North American business. Japanese firm Normura Holdings has just bought Lehman Brother's Asia-Pacific unit. Morgan Stanley is said to be fighting for survival and China’s Bank Citic is being discussed as a possible rescuer and Singapore's own GIC is eyeing distressed US financial assets. Does this signal the irresistible shift of global power to Asia?

As the US government unveiled what is the largest overhaul of government-led financial regulation since the Great Depression, some opinion makers and stakeholders around the world now argue that the recent events signal the end of US-led capitalism. [Sung]

● “The End Of American Capitalism As We Knew It”
Financial Times

● “The World As We Know It Is Going Down”
Spiegel Online

● “Crisis Exposes Flaws in U.S. Economy, Tarnishes Image”
Bloomberg

● “Is this the end of US Capitalism”
Al Jazeera asks five prominent economists - Does the crisis signal the end of US-style capitalism? And if so, what are the lessons learned?

● “We Are All Capitalist Now? Not Any Longer”
The Times

SWFs: Known Unknown or Unknown Unknown

Donald Rumsfeld once said, “there are things we know we know. We also know there are known unknowns. But there are also unknown unknowns -- the ones we don't know we don't know."

Rumsfeld certainly wasn’t referring to Sovereign Wealth Funds (SWFs; see SWFs ranking) but these have certainly become one of the unknowns to many. The world saw a number of countries setting up their own SWFs to manage their accumulated wealth. The IMF estimated last year that SWFs now control nearly USD 3 trillion and that by 2012, the figure could reach USD 12 trillion. USD 3 trillion is significant when you consider that the total current value of traded securities in Africa, the Middle East and Eastern Europe combined is about USD 4 trillion.

Some argue that SWFs are useful tools to diversify and strengthen their economies while others have pointed out the lack of transparency (very few disclose information about their assets, liabilities, investment strategies, etc) and potential abuse of power.

SWFs certainly challenge the traditional notions of governance within existing international financial institutions and this will be one of key issues that CAG’s Global Finance Governance study group will examine when it convenes in Singapore in December.

Edwin Truman, Senior Fellow at the Peterson Institute for International Economics explodes myths surrounding SWFs in his latest article titled “Sovereign Wealth Funds: Debunking Four Popular Myths” in which he outlines four popular myths: (1) about "them" not "us" (2) all the same in their opacity (3) a net benefit to the international financial system, and (4) not like hedge funds. Read Truman's article. [Sung]

More checks and balances

Today’s major financial issues have far-reaching implications traversing well beyond any national boundary. These issues are global in scope and thus require global solutions. As the global financial market faces unprecedented challenges on the one hand and rapidly decreasing resources on the other, greater cooperation is needed among states, private sectors and civil society groups around the world in order to work together through various institutional arrangements. These efforts must also be supported by the adoption and enforcement of binding rules at all levels of financial activities.

The concept of global governance – systems with global effect created and regulated by multilevel private and public actors in variegated institutional arrangements – thus becomes increasingly relevant as the globalisation of the financial market takes place. And CAG’s Global Governance project is looking into this very issue.

Many have argued in the recent years that the entire system for global financial regulation is in serious need of a major update. The question is, how. Kenneth Rogoff, Professor of Economics and Public Policy at Harvard and formerly chief economist at the IMF ponders whether more regulated financial markets with stricter rules and enforcements to curb what he calls “financial triumphalism”, would do the trick. He points out that historically the eras of heavy financial regulation tend to have significantly fewer financial crises than lightly regulated free-wheeling eras. He writes: “No one is suggesting that we go back to the ‘financial repression’ of the 1950’s…financial innovation ought to be allowed to flourish but not without better checks and balances. Otherwise, we will be forever trapped in a framework where taxpayers are forced to bailout banks in bad times, while wealthy shareholders reap huge profits in good times.” Read Kenneth Rogoff's article titled "The End of Financial Triumphalism" in PROJECT SYNDICATE. [Sung]

Professor Rogoff will deliever a talk titled "What do we know about exchange rates" at the LKYSPP on 18 August 2008. See details.